EM Preview for the week of August 1, 2021

Here's a look at the main drivers in Emerging Markets this week.

EM FX is coming off a good week, taking advantage of broad-based dollar weakness in the wake of a perceived dovish hold from the Fed. Our takeaway is that the hold was more hawkish than dovish and that the Fed remains on track to taper sooner rather than later. All eyes are on the U.S. data this week, culminating in jobs data Friday. While the U.S. is well-positioned to deal with the delta variant, most in EM are not and so the asset class remains vulnerable.

AMERICAS

Brazil reports July trade data Monday. June IP will be reported Tuesday and is expected to rise 0.3% m/m vs. 1.4% in May. COPOM meets Wednesday and is expected to hike rates 100 bp to 5.25%. if so, it would be an acceleration from the three 75 bp hikes seen so far in this cycle. Bloomberg consensus sees the policy rate peaking at 6.75% by end-2021. The fiscal outlook remains cloudy after President Bolsonaro pledged to increase the Bolsa Familia social program by at least 50%.

Colombia central bank minutes will be released Tuesday. The bank just delivered a hawkish hold last Friday, with 2 voting to hike rates 25 bp. The bank noted “The members of the board considered that the space for continuing the current level of monetary stimulus is narrowing, given the behavior of inflation and its possible persistence, as well as the upward revision of growth forecasts.” Colombia reports July CPI Thursday. Headline inflation is expected at 3.77% y/y vs. 3.63% in June. If so, it would be the highest since March 2020 and nearing the top of the 2-4% target range. Next policy meeting is September 30 and the tightening cycle is expected to begin with a 25 bp hike to 2.0%. Bloomberg consensus then sees 1 more hike in Q4, followed by 3 hikes in H1 and 2 hikes in H2 that would take the policy rate to 3.5% by end-2022.

Chile reports July CPI Friday. Headline inflation is expected at 4.1% y/y vs. 3.8% in June. If so, it would be the highest since June 2016 and above the 2-4% target range. Next policy meeting is August 31 and rates are expected to remain steady at 0.75%. The bank just started the tightening cycle with a 25 bp hike back in July but minutes from that meeting show that it is aiming for a gradual rate path. It added that market expectations for rate hikes were too fast given the medium-term risks. Bloomberg consensus sees 2-3 more hikes by year-end, followed by 3 hikes in H1 and 2 hikes in H2 that would take the policy rate to 2.75% by end-2022.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports July CPI Tuesday. Headline inflation is expected at 18.60% y/y vs. 17.53% in June. If so, it would be the highest since May 2019 and further above the 3-7% target range. Next policy meeting is August 12 and rates are expected to remain steady at 19.0%. Rates have been kept steady since the last 200 bp hike back in March 2021. While President Erdogan has been clamoring for rate cuts, persistently high inflation suggests rates will remain at current levels into autumn. After this month’s meeting, next ones are scheduled for September 23, October 21, November 18, and December 16. Bloomberg consensus sees steady rates in Q3, then falling to 16.75% by year-end, 14.25% by mid-2022, and 12.75% by end-2022.

Czech National Bank meets Thursday and is expected to hike rates 25 bp to 0.75%. Inflation eased a tick to 2.8% y/y in June, the lowest since March and further within the 1-3% target band, while Q2 GDP growth disappointed at only 0.6% q/q. Yet officials seem willing to go ahead with an aggressive tightening cycle. Deputy Governor Nidetzky backs a hike this week and “can imagine” hikes at each subsequent policy meeting until new factors emerge. Bloomberg consensus sees a policy rate of 0.75% at year-end, 1.0% by mid-2022 and 1.50% by end-2022, which seems to dovish a path in light of the more hawkish central bank comments. Ahead of the decision, Czech Republic reports June retail sales that morning. June industrial and construction output and trade data will be reported Friday.

 Russia reports July CPI Thursday. Headline inflation is expected at 6.6% y/y vs. 6.5% in June. If so, it would be the highest since August 2016 and above the 4% target. Next policy meeting is September 10 and rates are expected to be hiked again. The bank just delivered a 100 bp hike to 6.5% back in July and said it was likely to continue hiking. Bloomberg consensus sees the policy rate peaking at 7.0% by year-end, followed by cuts to 6.75% in Q1, 6.5% in Q2, and 6.0% by end-2022. Of note, Governor Nabiullina recently said the bank will next month consider lowering its inflation target to 2% or 3%, with a final decision by mid-2022. The bank last week that it expects inflation to approach the current 4% target as soon as 2022 and “remain close to 4% further on.”

ASIA

Caixin reports July manufacturing PMI Monday. It is expected at 51.0 vs. 51.3 in June. Caixin then reports services and composite PMIs Wednesday, with services expected at 50.5 vs. 50.3 in June. Over the weekend, official PMI readings were reported. Manufacturing came in at 50.4 vs. 50.8 expected and 50.9 in June while services came in as expected at 53.3 vs. 53.5 in June, which dragged the composite PMI down half a point to 52.4. July trade data will be reported Saturday local time, with exports expected to rise 19.1% y/y vs. 32.2% in June and imports expected to rise 35.4% y/y vs. 36.7% in June. Meanwhile, China’s securities regulator called for talks with its U.S. counterpart after the U.S. Securities and Exchange Commission suspended IPOs of Chinese companies until they improved their disclosures of shareholder risks. SEC Chair Gensler said the Chinese government’s recent actions, including enhanced security reviews of Chinese firms seeking overseas listings, are “relevant to U.S. investors.”

Indonesia reports July CPI Monday. Headline inflation is expected at 1.46% y/y vs. 1.33% in June. Next policy meeting is August 19 and rates are expected to remain steady at 3.5%. At the last meeting July 22, the bank delivered a dovish hold by lowering its growth forecast to 3.5-4.3% for the year vs. 4.1-5.1% previously. Governor Warjiyo said “pro-growth” policy will be maintained into next year and also emphasized the need to “maintain exchange rate stability” given heightened uncertainty in global markets. Rates have been kept steady since the last 25 bp cut back in February 2021. Bloomberg consensus sees the first 25 bp hike by mid-2022, followed by another one in H2 that would take the policy rate to 4.0% by end-2022. Q2 GDP will be reported Thursday, with growth expected at 2.60% q/q vs. -0.96% in Q1.

Korea reports July CPI Tuesday. Headline inflation is expected to remain steady at 2.4% y/y. If so, it would remain above the 2% target. Next policy meeting is August 26 and rates are expected to remain steady at 0.5%. Rates have been kept steady since the last 25 bp cut back in May 2020, but Governor Lee has flagged a hike sometime this year. Bloomberg consensus sees the first 25 bp hike in Q4, followed by 1 hike in H1 and 1 hike next year that would take the policy rate to 1.0% by end-2022. This seems too dovish of a rate path. Over the weekend, July trade data came in slightly soft, with exports up 29.6% y/y vs. 30.9% expected and imports up 38.2% y/y vs. 44.0% expected, both slowing from June but still robust. June current account data will be reported Friday.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.5%. At the last meeting June 23, it kept rates steady at 0.5% but cut its 2021 growth forecast to 1.8% from 3.0% previously due largely to the sharp fall in tourism. Assistant Governor Titanun said the bank “stands ready to use limited policy space at the most effective timing. Loans and debt restructuring will be more targeted to help businesses and households than lowering interest rates.” We expect rates are likely to remain on hold through 2022, with risks of further backdoor easing via macroprudential measures. Thailand reports July CPI Thursday, with headline inflation expected at 0.93% y/y vs. 1.25% in June. If so, it would be the lowest since March and back below the 1-3% target range. Bloomberg consensus sees steady rates through next year, with very small odds of a hike in Q4 2022.

Philippines reports July CPI Thursday. Headline inflation is expected at 4.0% y/y vs. 4.1% in June. If so, it would be the lowest since December 2020 and back within the 2-4% target range. Next policy meeting is August 12 and rates are expected to remain steady at 2.0%. At the last meeting June 24, delivered a dovish hold. Governor Diokno said “Economic activity has improved in recent weeks, but the overall momentum of the economic recovery remains tentative as the threat of Covid-19 infections continues.” As such, the bank “affirms its support to the economy for as long as necessary to ensure its strong and sustainable recovery.” Rates have been kept steady since the last 25 bp cut back in November 2020. Bloomberg consensus sees steady rates through most of next year, with the first 25 bp hike expected in Q4 2022.

Reserve Bank of India meets Friday and is expected to keep rates steady at 4.0%. At the last meeting June 4, the bank kept rates steady while its bond purchase program was increased by another INR 1.2 trln in Q3. It also announced additional liquidity provisions to some lockdown-impacted sectors. The bank said it would maintain its accommodative policy for as long as necessary to achieve growth on a durable basis. We are not convinced the easing cycle is over, especially after the ongoing reliance on QE. Rates have been kept steady since the last 40 bp cut back in May 2020. Bloomberg consensus sees steady rates through year-end, with a 25 bp hike seen in H1 2022 and another one in H2 2022 that would take the policy rate to 4.5% by end-2022.

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